Options profit target
- Thread starter GordonHui
- Start date
Depends on your testing and experience. For example I usually set GTC sell orders near a 100% profit. That corresponds to about a 6-10% move in the underlying if IV is around 30-50%, for near-money, near-month options.
Also, try hard to mostly trade liquid underlyings/options, near the money. Your life will be easier. Spreads don't have to be a mile wide on the ops you trade.
Also, try hard to mostly trade liquid underlyings/options, near the money. Your life will be easier. Spreads don't have to be a mile wide on the ops you trade.
To get around bad options bid/ask spreads: use the underlying (U) to neutralize position delta
Eg, for a long 40 call w/ 1 week till expiration, and U reaches your 50 target: sell 100 shares of U, don't exit the call. More precisely, sell a number of shares equal to the 100 x the delta of the long call.
NB during a RT down from U=50, you will benefit from options delta being < 1 and declining, ie the decline of the call price will be less than that of U -- thus you come out ahead due to option having smaller delta than U. Set a 2nd limit order to exit U / long call combo at at price that you think is the most reasonably profitable one to capture that spread. Key is that you've already exited the original position at your target, so this second exit is additional potential profit, and there's no rush make that 2nd transaction, as most of the original position profit is already taken.
If your target defines on option price largely independent of U price, there may be some additional nuances that others here might wish to address.
Eg, for a long 40 call w/ 1 week till expiration, and U reaches your 50 target: sell 100 shares of U, don't exit the call. More precisely, sell a number of shares equal to the 100 x the delta of the long call.
NB during a RT down from U=50, you will benefit from options delta being < 1 and declining, ie the decline of the call price will be less than that of U -- thus you come out ahead due to option having smaller delta than U. Set a 2nd limit order to exit U / long call combo at at price that you think is the most reasonably profitable one to capture that spread. Key is that you've already exited the original position at your target, so this second exit is additional potential profit, and there's no rush make that 2nd transaction, as most of the original position profit is already taken.
If your target defines on option price largely independent of U price, there may be some additional nuances that others here might wish to address.
Matt_ORATS
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Gordon
You may consider a smoothing mechanism to estimate theoretical values for all options in the chain. Next, follow the best bids and offers and what their relationship to the theoretical values were. These could act as a layoff trade to make a spread from another option in a related set. The edge or profit that you would need on each option depends on the risk of spreading off and capturing the edge or profit. Thus, a thinly traded stock will demand more edge as will a more volatile stock.
You may consider a smoothing mechanism to estimate theoretical values for all options in the chain. Next, follow the best bids and offers and what their relationship to the theoretical values were. These could act as a layoff trade to make a spread from another option in a related set. The edge or profit that you would need on each option depends on the risk of spreading off and capturing the edge or profit. Thus, a thinly traded stock will demand more edge as will a more volatile stock.